A SPAC Bubble Is The Biggest Risk For Social Capital Hedosophia Holdings Corp. VI

A single biggest reason to consider Social Capital Hedosophia Holdings Corp. VI (NYSE:IPOF)  is Chamath Palihapitiya. Another reason (in the absence of any business combination announcement), might be the fact that IPOF stock has corrected significantly in the recent past.

A photo of wooden blocks that say SPAC on a folded newspaper.

Source: Dmitry Demidovich/ShutterStock.com

A recent Bloomberg article talks about Chamath as the “King of SPACs.” While the article talks about him in detail, I like this line, in particular – “If SPACs are emblematic of a speculative mania, then Palihapitiya is the face of that moment.”

However, can the name be enough to recommend IPOF stock in the midst of a SPAC bubble?

Just for January 2021, SPACs completed $26 billion in share sale. This was a new monthly record. Of course, I am not the only one talking about a potential SPAC bubble.

A Harvard Business Review article by Ivana Naumovska talks about indicators beyond headline figures suggesting that “SPACs are a bubble about to burst.”

Similarly, an article from Wharton concludes that “the SPAC market, like with all markets after they’ve had a significant run, will likely see a correction soon.”

I would say that it’s next to impossible to time the markets. However, the risk-reward scenario seems largely tilted towards higher risk than significant returns.

If the bubble does bust, the Chamath brand name is unlikely to prevent a correction in IPOF stock. And a correction seems very imminent.

A Closer Look at IPOF Stock

If I was not worried about a potential SPAC bubble, I would not hesitate in considering a position in IPOF stock. Even now, investors can consider some exposure, but a big plunge in the stock is not advisable.

Coming back to Chamath, the billionaire has already sponsored six SPACs and raised total funds of $4.34 billion.

Back in September 2017, Chamath and Ian Osborne (CEO of Hedosophia), launched the first SPAC offering. The SPAC announced a business combination with Virgin Galactic Holdings (NYSE:SPCE), which has been among the hot stocks in the recent past.

In September 2020, Social Capital Hedosophia Holdings Corp. II (IPOB), announced a business combination with Opendoor Technologies (NASDAQ:OPEN). I believe that Virgin Galactic and Opendoor are quality long-term businesses.

More recently, Social Capital Hedosophia Holdings Corp. III (IPOC) completed a business combination with Clover Health Investments (NASDAQ:CLOV). However, CLOV stock has been an under-performer with Hindenburg Research alleging that the business faces an undisclosed investigation.

Overall, Social Capital does have a good track record.

However, the news related to Clover Health Investments might have hurt Chamath’s reputation. My point is backed by the stock trend in the recent past. Without a deal being announced, IPOF stock had surged to a high of $17.8. In the last one month, the stock has corrected by 15.4% and currently trades at $12.0.

IPOF Stock Will Pull Back

Churchill Capital Corp IV (NYSE:CCIV) has skyrocketed to $64.9 just on rumors of a potential business combination with Lucid Motors.

Once there was an official announcement, CCIV stock plunged. Currently, the stock trades at $24.2. I do believe that CCIV now trades at attractive levels and the sell-off might be overdone. As a matter of fact, all electric vehicle stocks have witnessed a deep correction in the recent past.

However, the key point I want to make is as follows: Even for a very attractive business combination, investors will get a good entry point.

In my view, it makes more sense to buy IPOF stock once the business combination is announced.

Concluding Views on IPOF

Currently, buying IPOF stock is purely on the basis of Chamath’s track record. Just this being the rationale for an investment does not sound great.

In particular, when the broad markets look expensive and there is a flood of SPACs.

I would therefore steer clear of IPOF stock. At best, some speculative positions can be considered if the stock trades around $10 levels.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. 

Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector.


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